UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 000-25328

FIRST KEYSTONE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2576479
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
22 West State Street Media, Pennsylvania	19063
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (610) 565-6210

Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of Common Stock outstanding as of April 30, 2009: 2,432,998

FIRST KEYSTONE FINANCIAL, INC.

Contents

		Page
PART I	FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of March 31, 2009 (Unaudited) and September 30, 2008		1
	Unaudited Consolidated Statements of Income for the Three and Six Months Ended March 31, 2009 and 2008		2
	Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended March 31, 2009 and 2008		3
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2009 and 2008		4
	Notes to Unaudited Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28
Item 4T.	Controls and Procedures		29
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Submission of Matters to a Vote of Security Holders		30
Item 5.	Other Information		31
Item 6.	Exhibits		31
SIGNATURES			33

FIRST KEYSTONE FINANCIAL, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)

	March			September
	31,			30,
	2009			2008
ASSETS:
Cash and amounts due from depository institutions	$	2,950		$	4,340
Interest-bearing deposits with depository institutions		43,322			34,980
Total cash and cash equivalents		46,272			39,320
Investment securities available for sale		21,885			26,545
Mortgage-related securities available for sale		101,714			102,977
Investment securities held to maturity — at amortized cost (approximate fair value of $3,379 at March 31, 2009 and $3,271 at September 30, 2008)		3,254			3,255
Mortgage-related securities held to maturity — at amortized cost (approximate fair value of $23,331 at March 31, 2009 and $25,204 at September 30, 2008)		22,699			25,359
Loans receivable (net of allowance for loan losses of $3,998 and $3,453 at March 31, 2009 and September 30, 2008, respectively)		289,914			286,106
Accrued interest receivable		2,248			2,452
FHLBank stock, at cost		7,060			6,995
Office properties and equipment, net		4,306			4,386
Deferred income taxes		3,451			4,323
Cash surrender value of life insurance		18,186			17,941
Prepaid expenses and other assets		3,282			2,397
TOTAL ASSETS	$	524,271		$	522,056
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities:
Deposits:
Non-interest-bearing	$	16,660		$	20,101
Interest-bearing		307,344			310,763
Total deposits		324,004			330,864
Advances from FHLBank and other borrowings		126,658			137,574
Repurchase agreements		21,665			3,585
Junior subordinated debentures		11,642			11,639
Accrued interest payable		1,871			1,886
Advances from borrowers for taxes and insurance		2,052			974
Accounts payable and accrued expenses		3,212			3,238
Total liabilities		491,104			489,760
Commitments and contingencies		—			—
Stockholders’ Equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value, 20,000,000 shares authorized; issued 2,712,556 shares; outstanding at March 31, 2009 and September 30, 2008, 2,432,998 shares		27			27
Additional paid-in capital		12,574			12,586
Employee stock ownership plan		(2,813	)		(2,872	)
Treasury stock at cost: 279,558 shares at March 31, 2009 and at September 30, 2008		(4,244	)		(4,244	)
Accumulated other comprehensive loss		(1,022	)		(2,714	)
Retained earnings — partially restricted		28,645			29,513
Total stockholders’ equity		33,167			32,296
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY:	$	524,271		$	522,056

See notes to unaudited consolidated financial statements.

-1-

FIRST KEYSTONE FINANCIAL, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)

	Three months ended					Six months ended
	March 31,					March 31,
	2009			2008		2009			2008
INTEREST INCOME:
Interest and fees on loans	$	4,092		$	4,391	$	8,353		$	9,062
Interest and dividends on:
Mortgage-related securities		1,424			1,583		2,978			2,963
Investment securities:
Taxable		316			402		666			797
Tax-exempt		46			42		88			84
Dividends		4			66		7			152
Interest on interest-bearing deposits		12			178		27			341
Total interest income		5,894			6,662		12,119			13,399
INTEREST EXPENSE:
Interest on:
Deposits		1,492			2,423		3,219			5,101
FHLBank and other borrowings		1,286			1,374		2,676			2,599
Junior subordinated debentures		286			365		571			732
Total interest expense		3,064			4,162		6,466			8,432
Net interest income		2,830			2,500		5,653			4,967
PROVISION FOR LOAN LOSS		700			14		775			56
Net interest income after provision for loan losses		2,130			2,486		4,878			4,911
NON-INTEREST INCOME:
Service charges and other fees		331			410		743			832
Net gain on sales of loans held for sale		75			—		83			—
Net (loss) gain on sale of investments		(10	)		—		180			69
Total other-than-temporary impairment losses		(994	)		—		(1,417	)		—
Portion of loss recognized in other comprehensive income (before taxes)		245			—		245			—
Net impairment loss recognized in earnings		(749	)		—		(1,172	)		—
Increase in cash surrender value of life insurance		90			178		245			360
Other income		98			120		189			209
Total non-interest income		(165	)		708		268			1,470
NON-INTEREST EXPENSE:
Salaries and employee benefits		1,438			1,440		2,911			2,870
Occupancy and equipment		415			417		812			817
Professional fees		297			299		659			581
Federal deposit insurance premium		219			49		329			100
Data processing		140			144		293			281
Advertising		84			110		215			211
Deposit processing		177			145		323			290
Other		403			378		782			774
Total non-interest expense		3,173			2,982		6,324			5,924
Income (loss) before income tax expense (benefit)		(1,208	)		212		(1,178	)		457
Income tax expense (benefit)		(402	)		5		(310	)		18
Net income (loss)	$	(806	)	$	207	$	(868	)	$	439
Earnings per common share:
Basic	$	(0.35	)	$	0.09	$	(0.37	)	$	0.19
Diluted	$	(0.35	)	$	0.09	$	(0.37	)	$	0.19
Weighted average shares — basic		2,325,768			2,317,080		2,324,670			2,315,998
Weighted average shares — diluted		2,325,768			2,317,337		2,324,670			2,316,311

See notes to unaudited consolidated financial statements.

-2-

FIRST KEYSTONE FINANCIAL, INC.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in thousands)

						Employee						Accumulated			Retained
			Additional			stock						other			earnings-			Total
	Common		paid-in			ownership			Treasury			comprehensive			partially			stockholders’
	stock		capital			plan			stock			loss			restricted			equity
BALANCE AT OCTOBER 1, 2007	$	27	$	12,598		$	(2,985	)	$	(4,244	)	$	(1,223	)	$	30,521		$	34,694
Net income		—		—			—			—			—			439			439
Other comprehensive income, net of taxes:
Net unrealized gain on securities
Net of reclassification adjustment(1)		—		—			—			—			715			—			715
Comprehensive income		—		—			—			—			—			—			1,154
ESOP shares committed to be released		—		—			55			—			—			—			55
Difference between cost and fair value of ESOP shares committed to be released		—		(3	)		—			—			—			—			(3	)
BALANCE AT MARCH 31, 2008	$	27	$	12,595		$	(2,930	)	$	(4,244	)	$	(508	)	$	30,960		$	35,900
BALANCE AT OCTOBER 1, 2008	$	27	$	12,586		$	(2,872	)	$	(4,244	)	$	(2,714	)	$	29,513		$	32,296
Net loss		—		—			—			—			—			(868	)		(868	)
Other comprehensive income, net of taxes:
Unrealized loss on securities for which an other-than-temporary impairment loss has been recognized		—		—			—			—			(162	)		—			(162	)
Net unrealized gain on securities Net of reclassification adjustment(1)		—		—			—			—			1,854			—			1,854
Comprehensive income		—		—			—			—			—			—			824
ESOP shares committed to be released		—		—			59			—			—			—			59
Difference between cost and fair value of ESOP shares committed to be released		—		(16	)		—			—			—			—			(16	)
Share-based compensation		—		4			—			—			—			—			4
BALANCE AT MARCH 31, 2009	$	27	$	12,574		$	(2,813	)	$	(4,244	)	$	(1,022	)	$	28,645		$	33,167

⁽¹⁾ Components of other comprehensive gain:

	March 31,
	2009		2008
Change in net unrealized loss on investment securities available for sale	$	1,037	$	761
Realized loss (gain) included in net loss (income), net of tax benefit (expense) of $337 and $(23), respectively		655		(46	)
Net unrealized gain on securities	$	1,692	$	715

See notes to unaudited consolidated financial statements.

-3-

FIRST KEYSTONE FINANCIAL, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

	Six months ended March 31,
	2009			2008
OPERATING ACTIVITIES:
Net (loss) income	$	(868	)	$	439
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for depreciation and amortization		288			285
Amortization of premiums and discounts		(4	)		40
Increase in cash surrender value of life insurance		(245	)		(360	)
(Gain) loss on sales of:
Loans held for sale		(83	)		—
Investment securities available for sale		85			(69	)
Mortgage-related securities available for sale		(265	)		—
Net impairment losses realized in earnings		1,172			—
Provision for loan losses		775			56
Amortization of ESOP		43			52
Share-based compensation		4			—
Changes in assets and liabilities which provided (used) cash:
Origination of loans held for sale		(10,035	)		—
Loans sold in the secondary market		10,118			—
Accrued interest receivable		204			170
Prepaid expenses and other assets		(885	)		(62	)
Accrued interest payable		(15	)		15
Accrued expenses		(26	)		401
Net cash provided by operating activities		263			967
INVESTING ACTIVITIES:
Loans originated		(73,031	)		(32,121	)
Purchases of:
Mortgage-related securities available for sale		(24,187	)		(41,625	)
Investment securities available for sale		(4,966	)		(4,977	)
Redemption of FHLB stock		1,328			1,521
Purchase of FHLB stock		(1,393	)		(1,480	)
Proceeds from sales of investment and mortgage-related securities available for sale		23,532			69
Principal collected on loans		68,421			46,103
Proceeds from maturities, calls, or repayments of:
Investment securities available for sale		4,421			3,027
Mortgage-related securities available for sale		8,753			7,981
Mortgage-related securities held to maturity		2,637			2,766
Purchase of property and equipment		(208	)		(110	)
Net cash used in investing activities		(5,307	)		(18,846	)
FINANCING ACTIVITIES:
Net decrease in deposit accounts		(6,860	)		(5,937	)
FHLBank advances and other borrowings — repayments		(98,940	)		(56,190	)
FHLBank advances and other borrowings — draws		88,024			54,002
Net increase in repurchase agreements		18,080			—
Net increase in advances from borrowers for taxes and insurance		1,078			1,173
Net cash provided by (used in) financing activities		1,382			(6,952	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		6,952			(24,831	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		39,320			52,935
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	46,272		$	28,104
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION:
Cash payments for interest on deposits and borrowings	$	6,481		$	8,417
Cash payments of income taxes		60			50

See notes to unaudited consolidated financial statements.

-4-

FIRST KEYSTONE FINANCIAL, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)

1.	BASIS OF PRESENTATION
	The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the periods.
	The results of operations for the three and six months ended March 31, 2009 are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2009 or any other period. The consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the First Keystone Financial, Inc. (the “Company”) Annual Report on Form 10-K for the year ended September 30, 2008.

2.	INVESTMENT SECURITIES
	The amortized cost and approximate fair value of investment securities available for sale and held to maturity, by contractual maturities, as of March 31, 2009 are as follows:

	March 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Available for Sale:
Municipal obligations:
1 to 5 years	$	813	$	3	$	—		$	816
5 to 10 years		3,602		145		(2	)		3,745
Over 10 years		997		49		—			1,046
Corporate bonds:
1 to 5 years		4,087		69		(10	)		4,146
5 to 10 years		1,532		28		—			1,560
Pooled trust preferred securities		8,534		—		(2,889	)		5,645
Mutual funds		3,865		20		—			3,885
Other equity investments		1,040		31		(29	)		1,042
Total	$	24,470	$	345	$	(2,930	)	$	21,885
Held to Maturity:
Municipal obligations:
1 to 5 years	$	2,586	$	95	$	—		$	2,681
5 to 10 years		668		30		—			698
Total	$	3,254	$	125	$	—		$	3,379

-5-

Provided below is a summary of investment securities available for sale and held to maturity which were in an unrealized loss position at March 31, 2009.

	Loss Position					Loss Position
	Less than 12 Months					12 Months or Longer					Total
	Approximate		Unrealized			Approximate		Unrealized			Approximate		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Corporate bonds	$	1,335	$	(10	)	$	—	$	—		$	1,335	$	(10	)
Pooled trust preferred securities		—		—			5,355		(2,889	)		5,355		(2,889	)
Municipal obligations		198		(2	)		—		—			198		(2	)
Other equity investments		276		(29	)		—		—			276		(29	)
Total	$	1,809	$	(41	)	$	5,355	$	(2,889	)	$	7,164	$	(2,930	)

The above table represents 21 investment securities where the current value is less than the related amortized cost.

Included in the first table above are pooled trust preferred securities. Trust preferred securities are very long-term (usually 30-year maturity) instruments with characteristics of both debt and equity, mainly issued by banks. All of the Company’s investments in trust preferred securities are of pooled issues, each consisting of 30 or more companies with geographic and size diversification. As of March 31, 2009, the Company had investments in five pooled trust preferred securities with an aggregate balance of $5.6 million. Although permitted by the debt instruments, as of March 31, 2009, none of the pooled trust preferred securities had begun to defer payments. However, as a result of the overall deterioration of the credit markets and the number of underlying issuers deferring interest payments, as well as issuers defaulting, the rating agencies have downgraded three of the Company’s investments in pooled trust preferred securities aggregating $2.2 million. Management believes that trust-preferred valuations have been negatively affected by an inactive market and by concerns that the underlying banks and other companies may have significant exposure to losses from sub-prime mortgages, defaulted collateralized debt obligations or other concerns.

In addition, the fair value of the Company’s $3.3 million investment in a mutual fund continued to decline during the period. Management attributes this continued decline to a widening of the spreads in the bond market for mortgage-related securities due to the ongoing instability in the mortgage markets.

The Company reviews investment debt securities on an ongoing basis for the presence of other than temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on individual investment securities were recognized during the second quarter of fiscal 2009 according to FSP FAS 115-2 and FAS 124-2 issued by FASB on April 9, 2009. This new guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss) (OCI). The credit-related OTTI recognized during the second quarter 2009 was $623,000, before taxes, and was solely related to available-for-sale securities newly having a book value of $3.6 million. Non-credit-related OTTI on these securities, which are not expected to be sold, was $220,000 and was recognized in OCI, net of taxes during the second quarter 2009.

-6-

The following table details the rollforward of credit-related losses recorded in earnings for the six months ended March 31, 2009:

	Pooled Trust
	Preferred
	Securities
Amount of Other-Than-Temporary Impairment Related to credit losses at October 1, 2008	$	—
Addition		490
Amount of Other-Than-Temporary Impairment Related to credit losses at March 31, 2009	$	490

At March 31, 2009, investment securities in a gross unrealized loss position for twelve months or longer consisted of six securities having an aggregate depreciation of 35.0% from the Company’s amortized cost basis. Management believes the declines in market value are the result of the current volatility in interest rates and turmoil in the capital and debt markets. Fair values for certain pooled trust preferred securities were determined utilizing discounted cash flow models due to the absence of a current market to provide a reliable market quotes for the instruments. The Company’s analysis for each pooled trust preferred securities performed at the CUSIP level shows that the credit quality of the individual bonds ranges from good to deteriorating. Credit risk does exist and the default of an individual issuer in a particular pool could affect the ultimate collectability of contractual amounts. The Company does not have the intent to sell these securities and it is more likely than not, that it will not have to sell the securities before recovery of their cost bases. However, the Company will continue to review its investment portfolio to determine whether any particular impairment is other than temporary. Management does not believe that any individual unrealized loss as of March 31, 2009 represents an other-than-temporary impairment.

Proceeds from the sales of available-for-sale securities for the three- and six- months ending March 31, 2009 totaled $250,000 and $4.2 million, respectively. Losses on sales of available-for-sale investment securities for the three- and six- months ending March 31, 2009 totaled $10,000 and $85,000, respectively. There were no gains on sales of available-for-sale investment securities for the three- and six- months ending March 31, 2009.

The amortized cost and approximate fair value of investment securities available for sale and held to maturity, by contractual maturities, as of September 30, 2008 are as follows:

	September 30, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Available for Sale:
U.S. Government bonds:
Over 10 years	$	2,965	$	7	$	—		$	2,972
Municipal obligations:
5 to 10 years		2,901		55		(22	)		2,934
Over 10 years		997		52		—			1,049
Corporate bonds:
Less than 1 year		1,000		4		—			1,004
1 to 5 years		1,057		—		(107	)		950
5 to 10 years		1,532		—		—			1,532

-7-

	September 30, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Pooled trust preferred securities		9,415		—		(2,835	)		6,580
Mutual funds		8,563		8		—			8,571
Other equity investments		1,040		—		(87	)		953
Total	$	29,470	$	126	$	(3,051	)	$	26,545
Held to Maturity:
Municipal obligations:
1 to 5 years	$	1,537	$	5	$	(9	)	$	1,533
5 to 10 years		1,718		21		(1	)		1,738
Total	$	3,255	$	26	$	(10	)	$	3,271

Provided below is a summary of investment securities available for sale and held to maturity which were in an unrealized loss position at September 30, 2008.

	Loss Position					Loss Position
	Less than 12 Months					12 Months or Longer					Total
	Approximate		Unrealized			Approximate		Unrealized			Approximate		Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Corporate bonds	$	950	$	(107	)	$	—	$	—		$	950	$	(107	)
Pooled trust preferred securities		5,118		(2,285	)		1,462		(550	)		6,580		(2,835	)
Municipal obligations		2,062		(32	)		—		—			2,062		(32	)
Other equity investments		553		(87	)		—		—			553		(87	)
Total	$	8,683	$	(2,511	)	$	1,462	$	(550	)	$	10,145	$	(3,061	)

The above table represents 13 investment securities where the current value is less than the related amortized cost.

Proceeds from the sales of available-for-sale securities for the three- and six- months ending March 31, 2008 totaled $69,000 and $69,000, respectively. Gains on sales of available-for-sale investment securities for the three- and six- months ending March 31, 2008 totaled $69,000 and $69,000, respectively. There were no losses on sales of available-for-sale investment securities for the three- and six- months ending March 31, 2008.

-8-

3.	MORTGAGE-RELATED SECURITIES
	Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:

	March 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Available for Sale:
FHLMC pass-through certificates	$	26,927	$	852	$	(3	)	$	27,776
FNMA pass-through certificates		47,068		1,508		(43	)		48,533
GNMA pass-through certificates		1,332		7		—			1,339
Collateralized mortgage obligations		25,105		186		(1,225	)		24,066
Total	$	100,432	$	2,553	$	(1,271	)	$	101,714
Held to Maturity:
FHLMC pass-through certificates	$	8,687	$	234	$	—		$	8,921
FNMA pass-through certificates		14,012		403		(5	)		14,410
Total	$	22,699	$	637	$	(5	)	$	23,331

Provided below is a summary of mortgage-related securities available for sale and held to maturity which were in an unrealized loss position at March 31, 2009.

	Loss Position					Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Pass-through certificates	$	7,504	$	(46	)	$	87	$	(5	)	$	7,591	$	(51	)
Collateralized mortgage obligations		1,674		(42	)		15,020		(1,183	)		16,694		(1,225	)
Total	$	9,178	$	(88	)	$	15,107	$	(1,188	)	$	24,285	$	(1,276	)

The above table represents 19 mortgage-related securities where the current value is less than the related amortized cost.

At March 31, 2009, mortgage-related securities in a gross unrealized loss position for twelve months or longer consisted of sixteen securities that at such date had an aggregate depreciation of 7.3% from the Company’s amortized cost basis. For the three months ending March 31, 2009, the Company’s $41,000 investments in three private-label collateralized mortgage obligations included in the first table above, were impaired as a result of the Company’s determination that the continued decline in its fair market value was other than temporary. As a result of this determination, the Company recognized a $126,000, before tax, non-cash charge, which was recorded in non-interest income. The Company does not have the intent to sell these securities and it is more likely than not, that it will not have to sell the securities before recovery of their cost bases. Management does not believe any other individual unrealized loss as of March 31, 2009 represents an other-than-temporary impairment. The unrealized losses reported for mortgage-related securities relate primarily to securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and private institutions. The substantial majority of the unrealized

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losses associated with mortgage-related securities are attributable to changes in interest rates and conditions in the financial and credit markets not due to the deterioration of the creditworthiness of the issuer. The Company has the ability and intent to hold these securities until the securities mature or recover in value.

The Company reviews mortgage-related securities on an ongoing basis for the presence of other than temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on individual investment securities were recognized during the second quarter of fiscal 2009 according to FSP FAS 115-2 and FAS 124-2 issued by FASB on April 9, 2009. This new guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss) (OCI). The credit-related OTTI recognized during the second quarter 2009 was $126,000, before taxes, and was solely related to available-for-sale securities newly having a book value of $41,000. Non-credit-related OTTI on these securities, which are not expected to be sold, was $26,000 and was recognized in OCI, net of taxes during the second quarter 2009.

The following table details the rollforward of credit-related losses recorded in earnings for the six months ended March 31, 2009:

	Collateralized
	Mortgage
	Obligations
Amount of Other-Than-Temporary Impairment Related to credit losses at October 1, 2008	$	—
Addition		43
Amount of Other-Than-Temporary Impairment Related to credit losses at March 31, 2009	$	43

Proceeds from the sales of available-for-sale mortgage-related securities for the three- and six- months ending March 31, 2009 totaled $0 and $19.3 million, respectively. Gains on sales of available-for-sale mortgage-related securities for the three- and six- months ending March 31, 2009 totaled $0 and $289,000, respectively. Losses on sales of available-for-sale mortgage-related securities for the three- and six- months ending March 31, 2009 totaled $0 and $24,000, respectively.

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Mortgage-related securities available for sale and mortgage-related securities held to maturity are summarized as follows:

	September 30, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Approximate
	Cost		Gain		Loss			Fair Value
Available for Sale:
FHLMC pass-through certificates	$	34,860	$	117	$	(175	)	$	34,802
FNMA pass-through certificates		41,982		235		(216	)		42,001
GNMA pass-through certificates		1,669		10		—			1,679
Collateralized mortgage obligations		25,653		3		(1,161	)		24,495
Total	$	104,164	$	365	$	(1,552	)	$	102,977
Held to Maturity:
FHLMC pass-through certificates	$	9,776	$	42	$	(84	)	$	9,734
FNMA pass-through certificates		15,582		3		(116	)		15,469
Collateralized mortgage obligations		1		—		—			1
Total	$	25,359	$	45	$	(200	)	$	25,204

Provided below is a summary of mortgage-related securities available for sale and held to maturity which were in an unrealized loss position at September 30, 2008.

	Loss Position					Loss Position
	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Pass-through certificates	$	54,080	$	(561	)	$	1,401	$	(30	)	$	55,481	$	(591	)
Collateralized mortgage obligations		17,914		(678	)		6,385		(483	)		24,299		(1,161	)
Total	$	71,994	$	(1,239	)	$	7,786	$	(513	)	$	79,780	$	(1,752	)

The above table represents 66 mortgage-related securities where the current value is less than the related amortized cost.

There were no sales of mortgage-related securities for the six months ended March 31, 2008.

4.

FAIR VALUE MEASUREMENT

In the first quarter of 2009, the Company adopted the provisions of FAS No. 157, Fair Value Measurements, for financial assets and financial liabilities. FAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. The FASB issued Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under statement 13, which removed leasing transactions accounted for under FAS No. 13 and related guidance from the scope of FAS No. 157. On April 9, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 157-4 (“FSP 157-4”), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. The Company elected to early adopt this FSP and the results have been applied on the financial statements and disclosures herein, without a material impact on the consolidated financial statements. FSP 157-4 provides guidance

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for determining fair value if there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In that circumstance, transactions or quoted prices may not be determinative of fair value. Significant adjustments may be necessary to quoted prices or alternative valuation techniques may be required in order to determine the fair value of the asset or liability under current market conditions.

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable that inputs reflect a reporting entity’s own assumptions about the parameters that market participants would use in pricing an asset or liability.

Most of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Impaired loans are reported at fair value utilizing level 2 inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan loss is allocated to the loan.

Securities reported at fair value utilizing Level 1 inputs are limited to actively traded equity securities whose market price is readily available from the New York Stock Exchange or the NASDAQ exchange.

Securities reported at fair value utilizing Level 3 inputs consist predominantly of corporate debt securities for which there is no active market. Fair values for these securities are determined utilizing discounted cash flow models which incorporate various assumptions including average historical spreads, credit ratings, and liquidity of the underlying securities.

Assets measured at fair value on a recurring and nonrecurring basis are summarized as follows:

	Fair Value Measurement at March 31, 2009 Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale securities measured on a recurring basis	$	122,096	$	4,526	$	106,371	$	11,198
Impaired loans measured on a nonrecurring basis		1,814		—		1,814		—
Total	$	123,800	$	4,526	$	108,075	$	11,198

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The following table presents the changes in the Level III fair-value category for the six months ended March 31, 2009. The Company classifies financial instruments in Level III of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.

	Fair Value
	Measurements
	Using
	Significant
	Unobservable
	Inputs
	(Level 3)
	Available for
	Sale Securities
Beginning balance	$	8,112
Total gains or losses (realized/unrealized)
Included in earnings (or changes in net assets)		(616	)
Included in other comprehensive income		(130	)
Purchases, issuances and settlements		(333	)
Transfers in and/or out of Level 3		4,165
Ending balance	$	11,198
The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	616

5.	LOANS RECEIVABLE
	Loans receivable consist of the following:

	March 31,			September 30,
	2009			2008
Single-family	$	144,234		$	145,626
Construction and land		28,746			27,493
Multi-family and commercial		54,507			54,419
Home equity and lines of credit		54,952			55,246
Consumer loans		1,487			1,330
Commercial loans		19,886			15,955
Total loans		303,812			300,069
Loans in process		(10,132	)		(10,802	)
Allowance for loan losses		(3,998	)		(3,453	)
Deferred loan costs		232			292
Loans receivable — net	$	289,914		$	286,106

At March 31, 2009 and September 30, 2008, non-performing loans (which include loans in excess of 90 days delinquent) amounted to approximately $3,893 and $2,420, respectively. At March 31, 2009, non-performing loans consisted of three single-family residential mortgage loans aggregating $672, six non-residential mortgage loans aggregating $2,190, two commercial business loans aggregating $461, one construction loan of $195, three home equity loans aggregating $366, and two consumer loans aggregating $8.

At March 31, 2009 and September 30, 2008 the Company had impaired loans with a total recorded

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investment of $2,856 and $817, respectively. Interest income of $5 and $12 was recognized on these impaired loans during the three and six months ended March 31, 2009, respectively. Interest income of approximately $57 and $104 was not recognized as interest income due to the non-accrual status of such loans for the three and six months ended March 31, 2009, respectively.

Loans collectively evaluated for impairment include residential real estate, home equity (including lines of credit) and consumer loans and are not included in the data that follow:

	March 31,		September 30,
	2008		2009
Impaired loans with related allowance for loan losses under SFAS No. 114	$	2,856	$	817
Impaired loans with no related allowance for loan losses under SFAS No. 114		—		—
Total impaired loans	$	2,856	$	817
Valuation allowance related to impaired loans	$	1,042	$	370

The following is an analysis of the allowance for loan losses:

	Six Months Ended
	March 31,
	2009			2008
Balance beginning of period	$	3,453		$	3,322
Provisions charged to income		775			56
Charge-offs		(250	)		(14	)
Recoveries		20			13
Total	$	3,998		$	3,377

6.	DEPOSITS
	Deposits consist of the following major classifications:

	March 31,					September 30,
	2009					2008
	Amount		Percent			Amount		Percent
Non-interest bearing	$	16,660		5.1	%	$	20,101		6.0	%
NOW		68,461		21.2			70,344		21.3
Passbook		37,067		11.4			34,796		10.5
Money market demand		44,641		13.8			43,572		13.2
Certificates of deposit		157,175		48.5			162,051		49.0
Total	$	324,004		100.0	%	$	330,864		100.0	%

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7.	EARNINGS PER SHARE
	Basic net income (loss) per share is based upon the weighted average number of common shares outstanding, while diluted net income (loss) per share is based upon the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of dilutive securities. All dilutive shares consist of options the exercise price of which is lower than the market price of the common stock covered thereby at the dates presented. At March 31, 2009 and 2008, anti-dilutive shares consisted of options covering 58,566 and 47,237 shares, respectively.
	The calculation of basic and diluted earnings per share (“EPS”) is as follows:

	For the Three Months Ended					For the Six Months Ended
	March 31,					March 31,
	2009			2008		2009			2008
Numerator	$	(806	)	$	207	$	(868	)	$	439
Denominators:
Basic shares outstanding		2,325,768			2,317,080		2,324,670			2,315,988
Effect of dilutive securities		—			257		—			323
Diluted shares outstanding		2,325,768			2,317,337		2,324,670			2,316,311
EPS:
Basic	$	(0.35	)	$	0.09	$	(0.37	)	$	0.19
Diluted	$	(0.35	)	$	0.09	$	(0.37	)	$	0.19

8.	REGULATORY CAPITAL REQUIREMENTS
	The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum regulatory capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
	Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of tangible and core capital (as defined in the regulations) to adjusted assets (as defined), and of Tier I and total capital (as defined) to average assets (as defined). Management believes, as of March 31, 2009, that the Bank met all regulatory capital adequacy requirements to which it was subject.

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     The Bank’s actual capital amounts and ratios are presented in the following table.

						Required for					Well Capitalized
						Capital Adequacy					Under Prompt
	Actual					Purpose					Corrective Action
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At March 31, 2009:
Core Capital (to Adjusted Tangible Assets)	$	43,681		8.35	%	$	20,928		4.0	%	$	26,160		5.0	%
Tier I Capital (to Risk-Weighted Assets)		43,681		13.35			N/A		N/A			19,633		6.0
Total Capital (to Risk-Weighted Assets)		46,656		14.26			26,177		8.0			32,722		10.0
Tangible Capital (to Tangible Assets)		43,621		8.34			7,847		1.5			N/A		N/A
At September 30, 2008:
Core Capital (to Adjusted Tangible Assets)	$	44,234		8.46	%	$	20,911		4.0	%	$	26,139		5.0	%
Tier I Capital (to Risk-Weighted Assets)		44,234		14.02			N/A		N/A			18,935		6.0
Total Capital (to Risk-Weighted Assets)		47,322		14.99			24,247		8.0			31,559		10.0
Tangible Capital (to Tangible Assets)		44,167		8.45			7,841		1.5			N/A		N/A

	On February 13, 2006, the Bank entered into a supervisory agreement with the Office of Thrift Supervision (“OTS”). The supervisory agreement requires the Bank, among other things, to maintain minimum core capital and total risk-based capital ratios of 7.5% and 12.5%, respectively. At March 31, 2009, the Bank was in compliance with such requirement. The Bank has been deemed to be “well-capitalized” for purposes of the prompt corrective action regulations by the OTS. However, due to the supervisory agreement, it is still deemed in “troubled condition.”
9.	RECENT ACCOUNTING PRONOUNCEMENTS
	In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is evaluating the impact of this pronouncement but does not expect that the guidance will have a material effect on the Company’s financial position or results of operations.
	In September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans”, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires that employers measure plan assets and obligations as of the balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. The other provisions of the Statement were effective for public companies as of the end of the fiscal year ending after December 15, 2006. The Company has determined that the guidance provided by SFAS No. 158 will not have an impact on its stockholders’ equity or on the Company’s financial position or results of operations.
	In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS No. 161”) to require enhanced disclosures about derivative instruments and hedging activities. The new standard has revised financial reporting for derivative instruments and hedging activities by requiring more transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires entities to provide more information about their liquidity by requiring disclosure of derivative features that are credit risk-related. Further, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company has determined that the adoption of this standard will not have a material effect on the Company’s results of operations or financial position.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing assumptions about renewal or extension used in estimating the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This standard is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The measurement provisions of this standard will apply only to intangible assets of the Company acquired after the effective date. The Company does not expect the adoption of FSP 142-3 to have a material effect on its results of operations or financial position.

In February 2007, the FASB issued FSP No. FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides. “This FSP provides conforming amendments to the illustrations in FAS Statements No. 87, 88, and 106 and to related staff implementation guides as a result of the issuance of FAS Statement No. 158. The conforming amendments made by this FSP are effective as of the effective dates of Statement No. 158. The unaffected guidance that this FSP codifies into Statements No. 87, 88, and 106 does not contain new requirements and therefore does not require a separate effective date or transition method. The Company is currently evaluating the impact the adoption of the FSP will have on the Company’s results of operations.

In February 2008, the FASB issued FSP No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP concludes that a transferor and transferee should not separately account for a transfer of a financial asset and a related repurchase financing unless (a) the two transactions have a valid and distinct business or economic purpose for being entered into separately and (b) the repurchase financing does not result in the initial transferor regaining control over the financial asset. The FSP is effective for financial statements issued for fiscal years beginning on or after November 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the FSP will have on the Company’s results of operations.

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement.)” This FSP provides guidance on the accounting for certain types of convertible debt instruments that may be settled in cash upon conversion. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the FSP will have on the Company’s results of operations.

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In June 2008, the FASB ratified EITF Issue No. 08-4, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios.” This Issue provides transition guidance for conforming changes made to EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjusted Conversion Ratios, that resulted from EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, and FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liability and Equity. The conforming changes are effective for financial statements issued for fiscal years ending after December 15, 2008, with earlier application permitted. The Company is currently evaluating the impact the adoption of the FSP will have on the Company’s results of operations.

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” to clarify that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic principle of the FSP is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS pursuant to the two-class method. The provisions of this FSP are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with the provisions of the FSP. The Company is currently evaluating the impact the adoption of the FSP will have on the Company’s results of operations.

In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP FAS 132(R)-1 requires more detailed disclosures about employers’ plan assets in a defined benefit pension or other postretirement plan, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and inputs and valuation techniques used to measure the fair value of plan assets. FSP FAS 132(R)-1 also requires, for fair value measurements using significant unobservable inputs (Level 3), disclosure of the effect of the measurements on changes in plan assets for the period. The disclosures about plan assets required by FSP FAS 132(R)-1 must be provided for fiscal years ending after December 15, 2009. As this pronouncement is only disclosure-related, it will not have an impact on the financial position and results of operations.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP requires companies acquiring contingent assets or assuming contingent liabilities in business combination to either (a) if the assets’ or liabilities’ fair value can be determined, recognize them at fair value, at the acquisition date, or (b) if the assets’ or liabilities’ fair value cannot be determined, but (i) it is probable that an asset existed or that a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated, recognize them at their estimated amount, at the acquisition date. If the fair value of these contingencies cannot be determined and they are not probable or cannot be reasonably estimated, then companies should not recognize these contingencies as of the acquisition date and instead should account for them in subsequent periods by following other applicable GAAP. This FSP also eliminates the FAS 141R requirement of disclosing in the footnotes to the financial statements the range of expected outcomes for a recognized contingency. This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this FSP is not expected to have a material effect on the Company’s results of operations or financial position

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. FSP No. FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. The

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Company has early adopted the provisions of FSP 157-4 during the second quarter of fiscal 2009 and the results have been applied in the financial statements and disclosures included herein, without a material impact.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP No. FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. The Company is currently evaluating the impact the adoption of the FSP will have on the Company’s results of operations.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. FSP SFAS No. 115-2 and SFAS No. 124-2 amends existing guidance for determining whether an impairment is other than temporary to debt securities and replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FSP SFAS No. 115-2 and SFAS No. 124-2, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. FSP No. FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending after June 15, 2009, but entities may early adopt this FSP for the interim and annual periods ending after March 15, 2009. The company has early adopted FAS 115-2 and FAS 124-2 during the second quarter of 2009 (see Notes 2 & 3).

In January 2009, the FASB issued final FSP No. EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” The FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment (OTTI) has occurred. The FSP retains and emphasizes the OTTI guidance and required disclosures in Statement 115, FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, SEC Staff Accounting Bulletin (SAB) Topic 5M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, and other related literature. The FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. Consistent with paragraph 15 of FSP FAS 115-1 and FAS 124-1, any other-than temporary impairment resulting from the application of Statement 115 or Issue 99-20 shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made (for example, December 31, 2008, for a calendar year-end entity). The adoption of the requirements of FSB No. EITF 99-20-1 by the Company did not have a material impact on its financial condition or results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements” based on management’s current expectations. The Company’s actual results could differ materially, as such term is defined in the Securities Act of 1933 and the Securities Exchange Act of 1934, from management’s expectations. Such forward-looking statements include statements regarding management’s current intentions, beliefs or expectations as well as the assumptions on which such statements are based. These forward-looking statements are subject to significant business, economic and competitive uncertainties and contingencies, many of which are not subject to the Company’s control. Existing stockholders and potential stockholders of the Company are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and investment portfolios, changes in accounting principles, policies or guidelines, availability and cost of energy resources and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees.

     The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results that occur subsequent to the date such forward-looking statements are made.

General

     The Company is a Pennsylvania corporation and the sole stockholder of the Bank, a federally chartered stock savings bank, which converted to the stock form of organization in January 1995. The Bank is a community-oriented bank emphasizing customer service and convenience. The Bank’s primary business is attracting deposits from the general public and using those funds, together with other available sources of funds, primarily borrowings, to originate loans. The Bank’s management remains focused on its long-term strategic plan to continue to shift the Bank’s loan composition towards increased investment in commercial, construction and home equity loans and lines of credit in order to provide a higher yielding loan portfolio with generally shorter contractual terms. In view of the Company’s implementation of an enhanced credit review and loan administration infrastructure, as well as underwriting standards with respect to the origination of commercial loans, the Company has begun to prudently renew its emphasis on the origination of commercial loans. In furtherance of such goal, the Company recently engaged an experienced commercial loan officer and a commercial business development officer. However, in light of current economic conditions and the Company’s overriding goal of protecting its asset quality, it is expected that growth of the commercial loan portfolio will be slow for the foreseeable future.

Critical Accounting Policies

     Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets or comprehensive income, are considered critical accounting policies. In management’s opinion, the three most critical accounting policies affecting the Company’s financial statements are the evaluation of the allowance for loan losses, income taxes and fair value accounting. The Company maintains an allowance for loan losses at a level management believes is sufficient to provide for known and inherent losses in the loan portfolio that are both probable and reasonable to estimate. The allowance for loan losses is considered a critical accounting estimate because there is a large degree of judgment in (i) assigning individual loans to specific risk levels (pass, substandard, doubtful and loss), (ii) valuing the underlying collateral securing the loans, (iii) determining the appropriate reserve factor to be applied to specific risk levels for criticized

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and classified loans (special mention, substandard, doubtful and loss) and (iv) determining reserve factors to be applied to pass loans based upon loan type. Accordingly, there is a likelihood that materially different amounts would be reported under different, but reasonably plausible conditions or assumptions.

Allowance for Loan Losses. The determination of the allowance for loan losses requires management to make significant estimates with respect to the amounts and timing of losses and market and economic conditions. Accordingly, adverse conditions in the economy and the market could increase loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. The Bank will continue to monitor and adjust its allowance for loan losses through the provision for loan losses as economic conditions and other factors dictate. Management reviews the allowance for loan losses generally on a monthly basis, but at a minimum at least quarterly. Although the Bank maintains its allowance for loan losses at levels considered adequate to provide for the inherent risk of loss in its loan portfolio, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Bank’s determination as to the amount of its allowance for loan losses is subject to review by its primary federal banking regulator, the OTS, as part of its examination process, which may result in additional provisions to increase the allowance based upon the judgment and review of the OTS.

Income Taxes. Management makes estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision from management’s initial estimates. In evaluating our ability to recover deferred tax assets, management considers all available positive and negative evidence, including our past operating results and our forecast of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Fair Value Measurement. Under SFAS No. 157, Fair Value Measurements, we group our assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

• Level 1 — Valuation is based upon quoted prices for identical instruments traded in active markets.

• Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

• Level 3 — Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

     Under SFAS No. 157, we base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in SFAS No. 157. Fair value measurements for most of our assets are obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid and other market information. Substantially all of our financial instruments use either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. In certain cases, however, when market observable

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inputs for model-based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of financial instruments. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. When market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future valuations.

     At March 31, 2009 and September 30, 2008, the Company had assets that were measured at fair value on a recurring basis that use Level 3 measurements totaling $11.2 million and $10.9 million, respectively. The Company also had assets that were measured at fair value on a nonrecurring basis that use Level 3 measurements. See Note 4 in the Notes to the Unaudited Consolidated Financial Statements herein for a further description of our fair value measurements.

Supervisory Agreements

     On February 13, 2006, the Company and the Bank each entered into a supervisory agreement with the OTS which primarily addressed issues identified in the OTS’ reports of examination of the Company’s and the Bank’s operations and financial condition conducted in 2005.

     Under the terms of the supervisory agreement between the Company and the OTS, the Company agreed to, among other things, (i) develop and implement a three-year capital plan designed to support the Company’s efforts to maintain prudent levels of capital and to reduce its debt-to-equity ratio below 50%; (ii) not incur any additional debt without the prior written approval of the OTS; and (iii) not repurchase any shares of or pay any cash dividends on its common stock until the Company complied with certain conditions. Upon reducing its debt-to-equity below 50%, the Company may resume the payment of quarterly cash dividends at the lesser of the dividend rate in effect immediately prior to entering into the supervisory agreement ($0.11 per share) or 35% of its consolidated net income (on an annualized basis), provided that the OTS, upon review of prior written notice from the Company of the proposed dividend, does not object to such payment.

     The Company submitted to and received from the OTS approval of a capital plan, which called for an equity infusion in order to reduce the Company’s debt-to-equity ratio below 50%. As part of its capital plan, the Company conducted a private placement of 400,000 shares of common stock, raising gross proceeds of approximately $6.5 million. In June 2007, the net proceeds of approximately $5.8 million were used to reduce the amount of the Company’s outstanding debt through the redemption of $6.2 million of its junior subordinated debentures. As a result of such redemption, the Company’s debt-to-equity ratio is less than 50%. Although the Company’s debt-to-equity ratio is below 50%, it does not anticipate resuming the payment of dividends until such time as the Company’s operating results materially improve. During the quarter ended June 30, 2008, the Company redeemed the remaining $2.1 million of its floating rate junior subordinated debentures. In addition, the Company purchased $1.5 million of the $16.2 million of 9.7% fixed-rate trust preferred securities issued by First Keystone Capital Trust I. As a result, as of March 31, 2009 the Company held $5.0 million of such securities.

     Under the terms of the supervisory agreement between the Bank and the OTS, the Bank agreed to, among other things, (i) not grow in any quarter in excess of the greater of 3% of total assets (on an annualized basis) or net interest credited on deposit liabilities during such quarter; (ii) maintain its core capital and total risk-based capital in excess of 7.5% and 12.5%, respectively; (iii) adopt revised policies and procedures governing commercial lending; (iv) conduct periodic reviews of its commercial loan department; (v) conduct periodic internal loan reviews; (vi) adopt a revised asset classification policy and (vii) not amend, renew or enter compensatory arrangements with senior executive officers and directors, subject to certain exceptions, without the prior approval of the OTS. As a result of the growth restriction imposed on the Bank, the Company’s growth is currently and will continue to be

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substantially constrained unless and until the supervisory agreements are terminated or modified. As of March 31, 2006 and June 30, 2006, the Bank exceeded the growth limitation contained in the supervisory agreement with the OTS described above. Subsequent to June 30, 2006, the Bank reduced its assets sufficiently to be below the June 30, 2006 limitation. The OTS advised the Bank that it would not take any regulatory action against the Bank provided it was in compliance with the growth limitation as of September 30, 2006. The Bank has continued to comply with the growth restriction as of each quarter since and including September 30, 2006.

     As a result of the supervisory agreement, the Bank hired a Chief Credit Officer (who was promoted to Chief Lending Officer during the third quarter of fiscal 2008) who, under the direction of the Board and the Chief Executive Officer, has taken steps to enhance the Bank’s credit review analysis, develop loan administrative procedures and adopt an asset classification system. The Bank continues to address these areas in order to remain in full compliance with the terms of the supervisory agreements. At March 31, 2009, the Company believes it and the Bank are in compliance with all the operative provisions of both supervisory agreements.

Comparison of Financial Condition at March 31, 2009 and September 30, 2008

     The Company’s total assets increased by $2.2 million, from $522.1 million at September 30, 2008 to $524.3 million at March 31, 2009. Loans receivable increased by $3.8 million, from $286.1 million at September 30, 2008 to $289.9 million at March 31, 2009 with the majority of the increase accounted for by growth in the commercial business and construction loan portfolios. Cash and cash equivalents increased by $7.0 million to $46.3 million at March 31, 2009 from $39.3 million at September 30, 2008 primarily due to sales of mortgage-related and investment securities available for sale and prepayments on mortgage-related and investment securities. Deposits decreased $6.9 million, or 2.1%, from $330.9 million at September 30, 2008 to $324.0 million at March 31, 2009. The decrease in deposits resulted from a $3.4 million, or 17.1%, decrease in non-interest bearing accounts, a $4.9 million, or 3.0%, decrease in certificates of deposit, and a $1.9 million, or 2.7% decrease in NOW accounts. The decreases were partially offset by increases of $2.3 million, or 6.5%, and $1.0 million, or 2.5%, in passbook and money market accounts, respectively.

Stockholders’ equity increased $871,000 from $32.3 million at September 30, 2008 to $33.2 million at March 31, 2009, primarily due to a $1.7 million decrease in accumulated other comprehensive loss partially offset by the net loss of $868,000 for the six months ended March 31, 2009. The decline in accumulated other comprehensive loss reflected primarily the further improvement in fair market values of certain of the Company’s available for sale mortgage-related securities.

Comparison of Results of Operations for the Three and Six Months Ended March 31, 2009 and 2008

Net Income (Loss). Net loss was $806,000, or $0.35 per diluted share, for the quarter ended March 31, 2009 as compared to net income of $207,000, or $0.09 per diluted share, for the same period in 2008. Net loss for the six months ended March 31, 2009 was $868,000 of $0.37 per diluted share as compared to net income of $439,000, or $0.19 per diluted share for the same period in 2008. The losses in both 2009 periods were primarily due to impairment charges related to certain of the Company’s investment securities as discussed below.

Net Interest Income. Net interest income increased $330,000, or 13.2%, to $2.8 million and $686,000, or 13.8% to $5.7 million for the three and six months ended March 31, 2009, respectively, as compared to the same periods in 2008. The increases in net interest income for the three and six months ended March 31, 2009 were primarily due to decreases in interest expense of $1.1 million, or 26.4% and $2.0 million, or 23.3%, respectively, as compared to the same periods in 2008. The decreases in interest expense for the three and six months ended March 31, 2009 were partially offset by decreases in interest income of $768,000, or 11.5%, and $1.3 million, or 9.6%, respectively, as compared to the same periods in 2008. The weighted average yield earned on interest-earning assets for the three and six months ended March 31, 2009 decreased 41 basis points to 5.21% and 43 basis points to 5.32%, respectively, compared to the same periods in 2008. For the three and six months ended March 31, 2009, the weighted average rate paid on interest-bearing liabilities decreased 83 basis points to 2.75% and 82 basis points to

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2.87%, respectively, for the same period in the prior fiscal year. The declines in both interest income and interest expense were in large part due to the declines in market rates of interest in the latter part of 2008 and 2009.

The interest rate spread and net interest margin were 2.46% and 2.50%, respectively, for the three months ended March 31, 2009 as compared to 2.04% and 2.11%, respectively, for the same period in 2008. The interest rate spread and net interest margin were 2.45% and 2.48%, respectively, for the six months ended March 31, 2009 as compared to 2.06% and 2.13%, respectively, for the same period in 2008.The slightly smaller increase in the net interest margin, as compared to the increase in spread for the three- and six-month comparisons, was primarily due to the relative shift in net interest-earning assets. The increase in the spread and margin reflected the more rapid repricing downward of the Company’s cost of funds as market rates declined during late 2008 and 2009.

     The following tables present the average balances for various categories of assets and liabilities, and income and expense related to those assets and liabilities for the three and six months ended March 31, 2009 and 2008.

	For the three months ended
	March 31, 2009							March 31, 2008
					Average							Average
	Average				Yield/			Average				Yield/
(Dollars in thousands)	Balance		Interest		Cost			Balance		Interest		Cost
Interest-earning assets:
Loans receivable(1)	$	285,271	$	4,092		5.74	%	$	277,586	$	4,391		6.33	%
Mortgage-related securities(2)		116,307		1,424		4.90			130,792		1,583		4.84
Investment securities(2)		31,624		366		4.63			40,398		510		5.05
Other interest-earning assets		19,390		12		0.25			25,638		178		2.78
Total interest-earning assets		452,592		5,894		5.21			474,414		6,662		5.62
Non-interest-earning assets		33,603							34,443
Total assets	$	486,195						$	508,857
Interest-bearing liabilities:
Deposits	$	324,838		1,492		1.84		$	342,678		2,423		2.83
FHLB advances and other borrowings		108,644		1,286		4.73			107,025		1,374		5.14
Junior subordinated debentures		11,641		286		9.83			15,264		365		9.56
Total interest-bearing liabilities		445,123		3,064		2.75			464,967		4,162		3.58
Interest rate spread(3)						2.46	%						2.04	%
Non-interest-bearing liabilities		7,469							7,647
Total liabilities		453,038							472,614
Stockholders’ equity		33,157							36,243
Total liabilities and stockholders’ equity	$	486,195						$	508,857
Net interest-earning assets	$	7,469						$	9,447
Net interest income			$	2,830						$	2,500
Net interest margin(3)						2.50	%						2.11	%
Ratio of average interest-earning assets to average interest-bearing liabilities						101.68	%						102.03	%

(1)	Includes non-accrual loans.
(2)	Includes assets classified as either available for sale or held to maturity.
(3)	Net interest income divided by average interest-earning assets.

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	For the six months ended
	March 31, 2009							March 31, 2008
					Average							Average
	Average				Yield/			Average				Yield/
(Dollars in thousands)	Balance		Interest		Cost			Balance		Interest		Cost
Interest-earning assets:
Loans receivable(1)	$	285,661	$	8,353		5.85	%	$	282,055	$	9,062		6.43	%
Mortgage-related securities(2)		119,806		2,978		4.97			122,739		2,963		4.83
Investment securities(2)		32,783		761		4.64			39,209		1,033		5.27
Other interest-earning assets		17,768		27		0.30			21,700		341		3.14
Total interest-earning assets		456,018		12,119		5.32			465,703		13,399		5.75
Non-interest-earning assets		34,124							34,594
Total assets	$	490,142						$	500,297
Interest-bearing liabilities:
Deposits	$	323,622		3,219		1.99		$	344,860		5,101		2.96
FHLB advances and other borrowings		114,875		2,676		4.66			97,312		2,599		5.34
Junior subordinated debentures		11,640		571		9.81			15,264		732		9.59
Total interest-bearing liabilities		450,137		6,466		2.87			457,436		8,432		3.69
Interest rate spread(3)						2.45	%						2.06	%
Non-interest-bearing liabilities		7,464							7,219
Total liabilities		457,601							464,655
Stockholders’ equity		32,541							35,642
Total liabilities and stockholders’ equity	$	490,142						$	500,297
Net interest-earning assets	$	5,887						$	8,267
Net interest income			$	5,653						$	4,967
Net interest margin(3)						2.48	%						2.13	%
Ratio of average interest-earning assets to average interest-bearing liabilities						101.31	%						101.81	%

(1)	Includes non-accrual loans.
(2)	Includes assets classified as either available for sale or held to maturity.
(3)	Net interest income divided by average interest-earning assets.

Provision for Loan Losses. Provisions for loan losses are charged to earnings to maintain the total allowance for loan losses at a level believed by management sufficient to cover all known and inherent losses in the loan portfolio which are both probable and reasonably estimable. Management’s analysis includes consideration of the Company’s historical experience, the volume and type of lending conducted by the Company, the amount of the Company’s classified and criticized assets, the status of past due principal and interest payments, general economic conditions, particularly as they relate to the Company’s primary market area, and other factors related to the collectability of the Company’s loan portfolio. For the three and six months ended March 31, 2009 as compared to the same periods in the prior fiscal year, the provision for loan losses increased $686,000 to $700,000 and $719,000 to $775,000, respectively. For the three and six months ended March 31, 2009, the provision for loan loss was based on the Company’s monthly review of the credit quality of its loan portfolio and the continual evaluation of the classified and pass loan portfolios in order to maintain the overall allowance for loan losses at a level deemed appropriate. The increase in the level of the provision reflected the increase in non-performing and classified assets.

At March 31, 2009, non-performing assets increased $1.5 million to $3.9 million, or 0.7%, of total assets, from $2.4

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million at September 30, 2008. This increase was primarily the result of an increase in non-accrual loans of $2.7 million, comprised of six commercial real estate loans aggregating $2.2 million, two commercial business loans aggregating $461,000, three home equity loans aggregating $366,000 and three single-family residential mortgages aggregating $672,000. The increase was partially offset by returns to performing status of four construction loans aggregating $1.4 million, four commercial business loans aggregating $227,000 and three single-family residential mortgages aggregating $218,000, all of which had been previously classified as over 90 days past due. The Company’s coverage ratio, which is the ratio of the allowance for loan losses to non-performing loans, was 102.7% and 142.7% at March 31, 2009 and September 30, 2008, respectively. In addition, loans 30 to 89 days delinquent increased $1.3 million, from $3.1 million at September 30, 2008 to $4.4 million at March 31, 2009. The increase was primarily the result of increases of $2.4 million, $816,000 and $142,000 in commercial mortgage loans, commercial business loans, and single-family residential mortgages, respectively, which were 30 to 89 days delinquent, partially offset by the return to current status of $2.0 million of construction loans that had been 30 to 89 days delinquent at September 30, 2008.

At March 31, 2009, the Bank’s classified assets increased by $3.6 million to $15.6 million compared to $11.9 million at September 30, 2008. At March 31, 2009, classified assets were comprised of substandard commercial business and commercial real estate loans aggregating $10.7 million, home equity loans aggregating $366,000, single-family residential mortgage loans aggregating $842,000, a construction loan of $195,000, private-label collateralized mortgage obligations aggregating $135,000, corporate bonds aggregating $2.2 million and a portion of the Company’s $3.3 million investment in a mutual fund of $223,000 which were all rated below investment grade at March 31, 2009. In addition, five commercial mortgage and commercial business loans aggregating $883,000 were classified as doubtful as of March 31, 2009.

Management continues to review its loan portfolio to determine the extent, if any, to which additional loss provisions may be deemed necessary. There can be no assurance that the allowance for losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required.

Non-interest Income. For the three months ended March 31, 2009, non-interest income decreased $872,000 to a loss of $165,000 as compared to the same period last year. The decrease was primarily due to a $749,000 non-cash impairment charge related to the determination that a portion of the declines in value of the Company’s $290,000 investment in one pooled trust preferred security, its $41,000 investment in three collateralized mortgage obligation securities and its $3.3 million investment in a mutual fund were other than temporary as discussed in Notes 2 and 3.

Non-interest income decreased $1.2 million to $268,000 for the six months ending March 31, 2009 as compared to the same period last year. The decrease was primarily the result of the $1.2 million non-cash impairment related to the determination that a portion of the decline in value of the Company’s $3.3 million investment in a mutual fund, its $290,000 investment in a pooled trust preferred security and its $41,000 investment in three collateralized mortgage obligation securities were other than temporary as discussed in Notes 2 and 3.

The market value of the Company’s investments may be affected by factors other than the underlying performance of the issuer or composition of the bonds themselves, such as ratings downgrades, adverse changes in business climate and lack of liquidity for resales of certain investment securities. The Company periodically, but not less than quarterly, evaluates investments and other assets for impairment indicators. The Company may be required to record additional impairment charges if investments suffer a decline in value that is considered other-than-temporary. If it is determined that a significant impairment has occurred, the Company would be required to charge against earnings the credit-related portion of the OTTI, which could have a material adverse effect on results of operations in the period in which the write-off occurs.

Non-interest Expense. Non-interest expense increased $191,000 to $3.2 million for the quarter ended March 31, 2009 as compared to the same period last year. The increase for the quarter ended March 31, 2009 was primarily due to increases of $170,000 and $33,000 in federal deposit insurance premiums and deposit processing expense, respectively, partially offset by a $26,000 decrease in advertising expense.

Non-interest expense increased $400,000 to $6.3 million for the six months ended March 31, 2009, as compared to the same period last year. The increase was primarily due to increases of $229,000, $78,000 and $33,000 in federal deposit insurance premiums, professional fees and deposit processing expense. The large increase in federal deposit

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insurance premiums for both periods was due to the Federal Deposit Insurance Company’s decision to increase rates to all insured institutions in response to the increased level of failed institutions and the costs thereof to the Deposit Insurance Fund.

Income Tax Expense. The Company’s income tax expense decreased $407,000 to a benefit of $402,000 and decreased $328,000 to a benefit of $310,000 for the three and six months ended March 31, 2009, respectively, as compared to the same period last year. The decrease was largely the result of the other-than-temporary impairment charges recorded on certain investment securities as mentioned previously.

Liquidity and Capital Resources

     The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The Company’s primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-related securities, sales of loans, maturities of investment securities and other short-term investments, borrowings and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-related securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan and mortgage-related securities prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, the Company invests excess funds in overnight deposits and other short-term interest-earning assets which provide liquidity to meet lending requirements. The Company has the ability to obtain advances from the FHLBank Pittsburgh through several credit programs with the FHLB in amounts not to exceed the Bank’s maximum borrowing capacity and subject to certain conditions, including holding a predetermined amount of FHLB stock as collateral. As an additional source of funds, the Company has access to the FRB discount window, but only after it has exhausted its access to the FHLB. At March 31, 2009, the Company had $102.7 million of outstanding advances and $24.0 million of overnight borrowings from the FHLBank Pittsburgh. The Bank currently has the ability to obtain up to $73.5 million of additional advances from the FHLBank Pittsburgh.

     Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer term basis, the Company maintains a strategy of investing in various lending products, mortgage-related securities and investment securities. The Company uses its sources of funds primarily to meet its ongoing commitments, to fund maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related and investment securities. As of March 31, 2009, total approved loan commitments outstanding amounted to $5.5 million, not including $9.9 million in loans in process. At the same date, commitments under unused lines of credit amounted to $33.5 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2009 totaled $109.3 million. Based upon the Company’s historical experience, management believes that a significant portion of maturing deposits will remain with the Company.

     The Bank is required under applicable federal banking regulations to maintain tangible capital equal to at least 1.5% of its adjusted total assets, core capital equal to at least 4.0% of its adjusted total assets and total capital (or risk-based) equal to at least 8.0% of its risk-weighted assets. At March 31, 2009, the Bank had tangible capital and core capital equal to 8.35% of adjusted total assets and total capital equal to 14.3% of risk-weighted assets. However, as a result of the supervisory agreement discussed in Item 2 of Part I hereof, the Bank is required to maintain core and risk-based capital in excess of 7.5% and 12.5%, respectively. The Bank is in compliance with such higher capital requirements imposed by the supervisory agreement.

Impact of Inflation and Changing Prices

     The Consolidated Financial Statements of the Company and related notes presented herein have been prepared in accordance with generally accepted accounting principles which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

     Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the

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same magnitude as the price of goods and services, since such prices are affected by inflation to a larger extent than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     For a discussion of the Company’s asset and liability management policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2008.

     The Company utilizes reports prepared by the OTS to measure interest rate risk. Using data from the Bank’s quarterly thrift financial reports, the OTS models the net portfolio value (“NPV”) of the Bank over a variety of interest rate scenarios. The NPV is defined as the present value of expected cash flows from existing assets less the present value of expected cash flows from existing liabilities plus the present value of net expected cash inflows from existing off-balance sheet contracts. The model assumes instantaneous, parallel shifts in the U.S. Treasury Securities yield curve up to 300 basis points, and a decline of 100 basis points.

     The interest rate risk measures used by the OTS include an “Exposure Measure” or “Post-Shock” NPV ratio and a “Sensitivity Measure”. The “Post-Shock” NPV ratio is the net present value as a percentage of assets over the various yield curve shifts. A low “Post-Shock” NPV ratio indicates greater exposure to interest rate risk and can result from a low initial NPV ratio or high sensitivity to changes in interest rates. The “Sensitivity Measure” is the decline in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The following sets forth the Bank’s NPV as of March 31, 2009.

Net Portfolio Value
(Dollars in thousands)
Changes in									Net
Rates in			Dollar			Percentage			Portfolio Value As
Basis Points	Amount		Change			Change			a % of Assets			Change
300	$	40,079	$	(11,536	)		(22	)%		7.70	%	(184) bp
200		45,927		(5,688	)		(11	)		8.68		(86) bp
100		49,930		(1,685	)		(3	)		9.32		(22) bp
50		50,795		(821	)		(2	)		9.43		(11) bp
0		51,615		—			—			9.54		— bp
(50)		51,394		(221	)		(0	)		9.47		(7) bp
(100)		50,706		(910	)		(2	)		9.33		(22) bp

     As of March 31, 2009, the Bank’s NPV was $51.6 million or 9.54% of the market value of assets. Following a 200 basis point increase in interest rates, the Bank’s “post shock” NPV would be $45.9 million or 8.68% of the market value of assets. The change in the NPV ratio or the Bank’s sensitivity measure was a decline of 86 basis points.

     As of December 31, 2008, the Bank’s NPV was $49.3 million or 9.19% of the market value of assets. Following a 200 basis point increase in interest rates, the Bank’s “post shock” NPV would be $42.5 million or 8.11% of the market value of assets. The change in the NPV ratio or the Bank’s sensitivity measure was a decline of 108 basis points.

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Item 4T. Controls and Procedures

     Our management evaluated, with the participation of our Chief Executive Officer (who also currently serves as our principal financial officer), the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to management, including the Chief Executive Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure and that such disclosure controls and procedures are operating in an effective manner.

     No change in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

No material changes have occurred in the legal proceedings previously disclosed in Item 3 of the Company’s Form 10-K for the fiscal year ended September 30, 2008.

Item 1A. Risk Factors

There were no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) — (b) Not applicable.

(c) Not applicable. No shares were repurchased by the Company during the quarter.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

     On February 4, 2009, the Company held its annual meeting of shareholders and submitted two proposals to shareholders on behalf of the Company’s Board of Directors (the election of a director and ratification of the appointment of the Company’s independent registered public accounting firm for fiscal 2009). Shareholders of record as of December 4, 2008, received proxy materials and were considered eligible to vote on these proposals at the annual meeting. At the annual meeting, 2,432,998 shares of common stock of the Company were outstanding on the record date and eligible to be voted at the meeting. Members of the Company’s Board of Directors not up for election and continuing in office after the annual meeting were Donald S. Guthrie, Bruce C. Hendrixson, Edmund Jones, Jerry A. Naessens, William J. O’Donnell and Nedret E. Vidinli.

A total of 2,236,656 shares of common stock were present in person or by proxy at the annual meeting. The following is a brief summary of each proposal and the result of the vote at the annual meeting:

1. The following director was elected by the requisite plurality of the votes cast to serve on the Company’s Board of Directors.

Nominee	For		Withheld
Donald G. Hosier, Jr.		1,964,887		271,769

2. To ratify the appointment of S.R. Snodgrass, A.C. as the Company’s independent registered public accounting firm for the fiscal year ended September 30, 2009.

For	Against	Abstain
2,156,412	64,948	15,296

There were no broker non-votes at the annual meeting.

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Item 5. Other Information

     (a) Not applicable

     (b) No changes in procedures.

Item 6. Exhibits

     List of Exhibits

Exhibit
No	Description
3.1	Amended and Restated Articles of Incorporation of First Keystone Financial, Inc. 1
3.2	Amended and Restated Bylaws of First Keystone Financial, Inc. 1
4.1	Specimen Stock Certificate of First Keystone Financial, Inc. 2
4.2	Instrument defining the rights of security holders **
10.1	Form of Amended and Restated Severance Agreement between First Keystone Financial, Inc. and Carol Walsh 3,*
10.2	Amended and Restated 1995 Stock Option Plan 3, *
10.3	Amended and Restated 1995 Recognition and Retention Plan and Trust Agreement 3,*
10.4	Amended and Restated 1998 Stock Option Plan 3, *
10.5	Form of Amended and Restated Severance Agreement between First Keystone Bank and Carol Walsh 3, *
10.6	Amended and Restated First Keystone Bank Supplemental Executive Retirement Plan 4,*
10.7	Amended and Restated Transition, Consulting, Noncompetition and Retirement Agreement by and between First Keystone Financial, Inc., First Keystone Bank and Donald S. Guthrie 3,*
10.8	Severance and Release Agreement by and among First Keystone Financial, Inc., First Keystone Bank and Thomas M. Kelly 5,*
10.9	Letter dated December 11, 2006 with respect to appointment to Board 6
10.10	Form of Registration Rights Agreement 7
11	Statement re: computation of per share earnings. See Note 2 to the Consolidated Financial Statements included in Item 8 hereof.
31.1	Section 302 Certification of Chief Executive Officer
31.2	Section 302 Certification of Chief Financial Officer
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2	Supervisory Agreement between First Keystone Financial, Inc. and the Office of Thrift Supervision dated February 13, 2006. 8
99.3	Supervisory Agreement between First Keystone Bank and the Office of Thrift Supervision dated February 13, 2006. 8

(1)	Incorporated by reference from Exhibit 3.1(with respect to the Articles) and Exhibit 3.2 (with respect to the Bylaws) on Form 8-K filed by the Registrant with the SEC on February 12, 2008.
(2)	Incorporated by reference from the Registration Statement on Form S-1 (Registration No. 33-84824) filed by the Registrant with the SEC on October 6, 1994, as amended.
(3)	Incorporated by reference from Exhibits 10.1, 10.4, 10.6, 10.5, 10.2 and 10.3 respectively, in the Form 8-K filed by the Registrant with the SEC on December 1, 2008 (File No. 000-25328).

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(4)	Incorporated by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant with SEC on July 2, 2007 (File No. 000-25328).
(5)	Incorporated by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant with the SEC on August 19, 2008.
(6)	Incorporated by reference from Exhibit 10.1 in the Form 8-K filed by the Registrant with the SEC on December 20, 2006.
(7)	Incorporated by reference from the Form 10-K filed by the Registrant with the SEC on December 29, 2006
(8)	Incorporated by reference from the Form 10-Q for the quarter ended December 31, 2005 filed by the Registrant with the SEC on February 14, 2006.
(*)	Consists of a management contract or compensatory plan
(**)	The Company has no instruments defining the rights of holders of long-term debt where the amount of securities authorized under such instrument exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRST KEYSTONE FINANCIAL, INC.
Date: May 15, 2009	By:	/s/ Hugh J. Garchinsky
		Hugh J. Garchinsky
		President and Chief Executive Officer (principal executive officer and principal financial officer)

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